Some welcome demerger concessions leave wider questions about the scope and rationale of distributions reform.
The Budget 2026 papers included a summary of responses to the consultation paper entitled ‘Modernising the taxation of distributions and repayments of capital’, which was published in June 2026.
The Government is proposing to press ahead with all seven proposals in the consultation paper. In doing so, the Government has rejected representations that the concerns that underlie many of the proposals in the consultation paper could be better addressed through reform of the anti-avoidance rules (in particular, the transactions in securities regime).
There will be a period of engagement and technical consultation throughout 2027, which is intended to result in legislation taking effect from 1 April 2028.
I will confine my comments to the core proposals: the ‘freezing’ of capital paid up on a share exchange; the liberalisation of the statutory demerger rules; and the extension of CTA 2010 Part 23 to distributions from non-UK companies.
In relation to the proposal to freeze the level of capital paid up on a share exchange, the response paper includes an important concession to exclude listed companies from any change in the law. Quite how this exclusion is intended to operate in practice is left for the next round of consultation to address. The response paper also offers no further clarity on the scope of the main proposal. Will there be an exclusion for intragroup share exchanges? Will the new rules apply only to share exchanges that do not involve a disposal for the purpose of tax on capital gains? Will there be a rebasing of capital following the acquisition of shares by a third party? Who knows? One welcome confirmation is that the new rules will not apply retrospectively. They will only apply to exchanges that take place after commencement in 2028.
As regards the reform of the statutory demerger regime, the response paper suggests that various changes will be made to the conditions for a demerger to qualify as an exempt distribution under the revised regime. These include the withdrawal of the unworkable suggestion that conditions E, H and J should be amended to refer to ‘all’ and not ‘substantially all’ of the ordinary share capital of the distributed company (in the case of conditions E and H) or the distributing company (in the case of condition J). The response paper also contains a commitment from HMRC to look again at other conditions which render the statutory demerger regime comparatively unattractive. These include condition D, which prevents a statutory demerger being used to facilitate an onward sale of a business (and which the consultation paper had suggested could be mitigated by providing for a five-year period before any onward sale), and (possibly) the capital payment regime. The response paper also hints at the possibility of relaxing the requirement for any distributed company to be a 75% subsidiary of the distributing company. This latter suggestion holds out the possibility of the revised regime being brought into line with the definition of a scheme of reconstruction (in TCGA 1992 Sch 5AA) that applies for tax on capital gains.
In relation to the extension of CTA 2010 Part 23 to distributions by non-UK companies to UK income taxpayers, perhaps the most helpful concession in the response paper is a commitment to ensure that the proposed extension does not have an adverse effect on existing fund management and investment structures. Quite how this objective will be achieved is again, as yet, unknown. Otherwise, it would appear that the Government proposes to restrict the charge to tax to distributions falling within paragraph B (other distributions out of assets), G (transfers of assets) or H (bonus issues following a repayment of capital) of CTA 2010 s 1000(1). The Government is to consider further whether and how to address bonus issues of redeemable shares (paragraph C), bonus issues of securities (paragraph D), and returns on non-commercial securities (paragraph E) and special securities (paragraph F).
There is a real risk that this consultation could descend into complexity. That said, the consultation response includes some welcome concessions and suggests that HMRC are in listening mode. If the outcomes were to be a principled set of distribution rules that can apply consistently across receipts from a wide range of corporate entities and a comprehensive demerger regime, that would represent a considerable achievement. It will require positive engagement from business and the advisory community.
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Distributions reform: unresolved questions
Some welcome demerger concessions leave wider questions about the scope and rationale of distributions reform.
The Budget 2026 papers included a summary of responses to the consultation paper entitled ‘Modernising the taxation of distributions and repayments of capital’, which was published in June 2026.
The Government is proposing to press ahead with all seven proposals in the consultation paper. In doing so, the Government has rejected representations that the concerns that underlie many of the proposals in the consultation paper could be better addressed through reform of the anti-avoidance rules (in particular, the transactions in securities regime).
There will be a period of engagement and technical consultation throughout 2027, which is intended to result in legislation taking effect from 1 April 2028.
I will confine my comments to the core proposals: the ‘freezing’ of capital paid up on a share exchange; the liberalisation of the statutory demerger rules; and the extension of CTA 2010 Part 23 to distributions from non-UK companies.
In relation to the proposal to freeze the level of capital paid up on a share exchange, the response paper includes an important concession to exclude listed companies from any change in the law. Quite how this exclusion is intended to operate in practice is left for the next round of consultation to address. The response paper also offers no further clarity on the scope of the main proposal. Will there be an exclusion for intragroup share exchanges? Will the new rules apply only to share exchanges that do not involve a disposal for the purpose of tax on capital gains? Will there be a rebasing of capital following the acquisition of shares by a third party? Who knows? One welcome confirmation is that the new rules will not apply retrospectively. They will only apply to exchanges that take place after commencement in 2028.
As regards the reform of the statutory demerger regime, the response paper suggests that various changes will be made to the conditions for a demerger to qualify as an exempt distribution under the revised regime. These include the withdrawal of the unworkable suggestion that conditions E, H and J should be amended to refer to ‘all’ and not ‘substantially all’ of the ordinary share capital of the distributed company (in the case of conditions E and H) or the distributing company (in the case of condition J). The response paper also contains a commitment from HMRC to look again at other conditions which render the statutory demerger regime comparatively unattractive. These include condition D, which prevents a statutory demerger being used to facilitate an onward sale of a business (and which the consultation paper had suggested could be mitigated by providing for a five-year period before any onward sale), and (possibly) the capital payment regime. The response paper also hints at the possibility of relaxing the requirement for any distributed company to be a 75% subsidiary of the distributing company. This latter suggestion holds out the possibility of the revised regime being brought into line with the definition of a scheme of reconstruction (in TCGA 1992 Sch 5AA) that applies for tax on capital gains.
In relation to the extension of CTA 2010 Part 23 to distributions by non-UK companies to UK income taxpayers, perhaps the most helpful concession in the response paper is a commitment to ensure that the proposed extension does not have an adverse effect on existing fund management and investment structures. Quite how this objective will be achieved is again, as yet, unknown. Otherwise, it would appear that the Government proposes to restrict the charge to tax to distributions falling within paragraph B (other distributions out of assets), G (transfers of assets) or H (bonus issues following a repayment of capital) of CTA 2010 s 1000(1). The Government is to consider further whether and how to address bonus issues of redeemable shares (paragraph C), bonus issues of securities (paragraph D), and returns on non-commercial securities (paragraph E) and special securities (paragraph F).
There is a real risk that this consultation could descend into complexity. That said, the consultation response includes some welcome concessions and suggests that HMRC are in listening mode. If the outcomes were to be a principled set of distribution rules that can apply consistently across receipts from a wide range of corporate entities and a comprehensive demerger regime, that would represent a considerable achievement. It will require positive engagement from business and the advisory community.
